Step 2: Setup Your Company
This content is for Fizzle members only.
This step should literally be a check list of things to knock out in your business. They are functional steps every business should take at some point. It's better to get them out of the way now so we can move on.
There is one exception, and that is finding a business partner. We'll start there.
Optional: Find a business partner
Y Combinator is one of the leading startup accelerators in the country and they try to actively avoid investing in solo startup founders.
"Starting a startup is too hard for one person. Even if you could do all the work yourself, you need colleagues to brainstorm with, to talk you out of stupid decisions, and to cheer you up when things go wrong."
The small business we're helping you start may not be the same thing as a venture-backed startup, but the same principle applies. Having a business partner or cofounder for your company can lighten the load, lead to stronger ideas and increased productivity.
Is a business partner a necessity? No.
Does it give you an advantage? Yes, if you choose well.
Fizzle had three co-founders. Great Northwest Wine, a Fizzler business, had two cofounders, which quickly allowed them to make fast progress.
Here are a couple of helpful articles for advice on how to find a business partner:
- Beginner's Guide to Finding the Right Business Partner | Quicksprout
- Startup 101: Finding the right business partner | Mashable
- How to Find Your Perfect Business Partner | Fast Company
Choose and File a Legal Entity
First things first: this is not legal advice. You should always consult legal counsel when making legal decisions. Additionally, we come from the perspective of the United States legal environment, and policies may vary by country.
No matter what, you should proactively choose a business structure for your new company. You might end up choosing a sole proprietorship, which doesn't require you to register with the government… but another entity structure might be better for your needs (and require you to file for a legal business entity).
Here are the most common business structures you may want to consider:
1. A sole proprietorship is the most basic business structure. You don't have to create a separate entity — in effect, you ARE the business simply by offering a product or service for sale. Under a sole proprietorship, your business income is filed as personal income. One downside is that you are personally liable for all business activities (debts, etc).
Note: many new businesses start out as sole proprietorships, switching to another structure after they've proven the business works.
2. A partnership is a business entity made up of more than one individual. Partnerships can come in one of three forms: general partnership, limited partnership, and joint ventures. In a general partnership, each partner has the same amount of ownership, as well as responsibility and liability. In a limited partnership, one or more partners holds a smaller proportion of ownership, as well as limited liability. A joint venture is generally formed for a short-term joint project. Partnerships have to be filed as business entities with your state and tax authority. Partnerships will be responsible for a variety of taxes, such as (but not limited to), income taxes, payroll taxes and more. Partnerships are the most basic way to team up with another person with complementary skills to start a business.
3. A limited liability company offers the simplicity of a partnership, but the protection from liability that comes from a corporate entity. LLC's are "pass-through" business structures. In this structure, business income is passed on to members of the LLC and taxed accordingly. For many businesses, the income would be passed on to individuals and then taxed like partners in a partnership. An LLC requires you to choose a name for the business, file the business entity with the state using "articles of organization," file with the tax authority, and then create an operating agreement for the members to agree upon. LLC's will also pay a variety of different taxes related to employment and benefits. The major advantage of an LLC is the limited liability that comes with it.
4. A corporation is an independent entity that is both taxed and liable for its own income and activities. Corporations are owned by groups of shareholders and are the right entity for an organization that wants to sell stock publicly, aka "go public." Corporations are often the most advanced business structure and are best if you plan to scale your company. The tax and legal reporting requirements of a corporation can be more complicated than other structures. At the same time, raising money, limited liability, have different classes of stock and goals of an IPO are all valid reasons for registering as a corporation.
5. An S-Corporation (US-based) is a hybrid entity that is a subset of a corporation entity status. The main difference comes from the taxation of business income. In a corporation, business income is taxed twice — once when recognized as business income and once when it is passed to shareholders as dividends. In an S-Corporation, business income is only taxed when it is passed on in the form of dividends. There are specific requirements from the IRS that apply to S-Corp status.
Only you can decide the best business structure for your business. The right structure for you might change based on your goals over time. The best way to make an informed decision is to do your own research and, if necessary, hire a lawyer to help you make the call. To learn more about the different options for business structure, the Small Business Administration is a great resource.
Once you've decided the best business entity for you, you'll need to register your entity with the state and file for a tax identification number (unless you're a sole proprietor). The easiest and fastest way to do this is to work with LegalZoom.com or a similar service. The safest and most thorough way to go is to work with a trusted business attorney. The thriftiest way is to file the entity on your own using the correct forms. The Small Business Administration maintains a list of state agency filing requirements for US-based businesses. None of this is necessary, of course, if you choose to operate under a sole proprietorship.
Licenses and Permits
In addition to filing for a legal business entity, you'll want to check with national, state and local agencies to be sure you have all of the proper licenses and permits. Again, the small business administration maintains a guide for applying for appropriate licenses and permits on their site.
Optional: File for a trademark
If you have a unique business name that is not already in use by a competitor, then you may want to consider filing for a trademark to protect your brand and name from competitors in your industry. This can take time and money to work with a lawyer to properly research and file for a trademark. That said, a trademark on your name can be a valuable asset. At Fizzle, we have a trademark on the Fizzle name.
To learn more about trademark, as well as the differences between trademark, copyright, patents, and your business name, check out this video from the US Patent and Trademark Office.
Open a Business Checking Account & Credit Card (Optional)
Remember: this is not financial advice. We are not financial advisors, accountants, or lawyers. Use this information as a starting point, not as decision criteria.
Your business needs access to financial resources. You'll need a checking account to accept money from customers. You'll likely want a business credit card to manage cash flow and cash in on the rewards that come with it. And you may want to explore other options like a business savings account and other options.
For more of our stories and ideas on small business accounting check this out:
At a minimum, we recommend starting with a business checking account. In general, a checking account with high interest rates on your deposits and low maintenance fees will be better than an account with low interest rates and high maintenance fees. When looking for a checking account, be sure to understand the minimum amount of money you need in the account to avoid fees.
Here are four major banks to consider for your business banking needs in the US (with links to their business services page):
Local banks and credit unions are often great options as well. Be sure to compare your options with at least one local banking provider to make sure you're getting the best benefits from your business banking.
A business credit card is a great way to pay for business expenses when month to month cash flow is uneven. Even when cash flow is great, the right business credit card can offer rewards well worth the membership fee. If you need money to fund startup costs, remember that credit cards have some of the highest interest rates of the many options for borrowing money. Carrying a balance can be a real pain, just as it is with personal credit. Credit cards are most useful for short term cash flow management and most beneficial when you pay the balance down completely each month.
When comparing credit cards, look at criteria like membership fees, APR (annual percentage rate), cash back rewards, travel rewards, insurance and warrantee coverage, and any other benefits that may be unique to a given card.
Here are a few places to get started in researching business credit cards:
Optional: Business Insurance
Like insurance for individuals and families, there are a variety of insurance options available to business owners.
General Business Insurance
Types of insurance that could cover you and your business include:
- General Liability — covers many instances of injury, negligence, and accidents. This is broad and general coverage. (think a client tripping over your briefcase during a web design review and breaking her arm)
- Product Liability — if you make a product, this is important for protecting you from damage done if your product malfunctions or has defects (think a child swallowing a part from a toy, or a commuter bicycle falling apart in the middle of a busy intersection)
- Professional Liability — the equivalent of product liability insurance, but for service providers. This will cover you in the case of errors or negligence in delivering services to clients (think physical training that leads to injury, or business coaching for a client whose company goes bankrupt)
- Commercial Property Insurance — just like you need insurance to protect your car or home, businesses need insurance to protect major assets. "Property" here is widely defined and can include everything from your client files to your Macbook to a building or office. (Think someone stealing all of your recording equipment, or your office burning down.)
- Home-Based Business — If your normal homeowners policy does not cover business assets and activities (be sure to check on this), a home-based business policy can help cover you if you work primarily from home.
You should always, always, always consult a licensed and intelligent insurance agent to help you make decisions about the right coverage for you. When you're just getting started, it may be good to simply start with basic liability coverage for your business and add on as you grow. Whatever you do, make sure you're comfortable with your level of coverage.
Here are a few places to begin your insurance research (the companies listed are all in the top ten for market capitalization in property and casualty insurance):
These insurance providers specialize, or have been recognized for, their business insurance coverage:
Once you begin to hire people full- or part-time, you'll have new insurance considerations. In particular, you'll need to think through Worker's Compensation, Unemployment (this is a tax filed with your state), and Disability insurance.
Be sure to consult with your lawyer, accountant, and insurance agent when you're ready to start hiring to make sure you're properly covered.
At this stage, it can be easy to get overwhelmed by the checklist. Remember that this step is truly about getting the financial, legal, and insurance structure in place so that you're ready to operate a business. Each element of this step is important, but it does not lead to business revenue. Keep that in mind if and when you get stuck during this step.
Above all else, make sure you are informed about the different options available to you for partnership, legal entities, licenses, trademark, checking and credit, as well as insurance. Being informed is the best way to make sure you have what you need to succeed.